Silk Road: pricey goods

Chinese policy makers have a taste for the grandiose. Their most eye-catching plan of late has been the "one belt one road" directive. It aims to build infrastructure links from China to Europe and the rest of Asia, cementing ties with central Asian and Middle Eastern neighbours en route.

Tuesday's news that state-owned China Railway Construction Corp has signed $5.5bn of contracts in Nigeria and Zimbabwe - following the signing of an even larger contract in Nigeria late last year - shows how far this "new silk road" extends.

Last year, China's government kicked off the plan by pledging $40bn to an infrastructure fund. This month it announced a capital injection of more than $60bn into two policy banks to beef up lending capacity. The sums are likely to grow. This month China promised $45bn infrastructure investment to Pakistan. The appetite is there: Asia alone needs to add $11tn in urban infrastructure by 2030, HSBC reckons. Countries such as Thailand and Indonesia have a shortfall of domestic capital. The former is already working with China on rail plans.

The largesse will not just flow abroad. Nearly $250bn will be spent in China's provinces, HSBC says, with transport a key focus. The government has targeted $130bn for railway investment this year.

Naturally, then, infrastructure companies have been outperforming even as the Chinese market as a whole surges. The Hong Kong-listed shares of China CNR and CSR Corp, state-owned rolling stock makers whose merger was approved last month, have each risen by one half this year. They trade at chunky price earnings multiples in the mid-20s, to go with mid-teens sales growth. The mainland A share listings have done even better, more than quintupling in the same period. They now trade at high premiums to the Hong Kong listings, having previously traded at a discount.

Not all of the sector is so dear. China Communications Construction, China Railway Construction and China Railway Group Hong Kong shares all trade at low to mid teens multiples for double-digit growth. The shares have risen even more strongly than the railcar makers. One might wonder how long this train can keep rolling. At the same time, the combined revenues of all five is just $280bn. Given the size of their potential markets, the share may not come off the rails just yet.

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